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Income tax rebate under section 87a? Working and Eligibility

Created on 15 Sep 2022

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Updated on 09 Dec 2022

Income tax rebate under section 87a? Working and  Eligibility

Even though they are unavoidable, we look for ways to avoid paying taxes. Every taxpayer tries to minimise their tax liability, but people do not educate themselves well enough. Though there are several ways to reduce a taxpayer's burden, the Government of India provides all citizens with a helpful resource – rebate u/s 87A of the Income Tax Act, 1961. In the current state of things, it is as if the Government is a shopkeeper that wants to give people a discount, but people are too frantic to listen and pay more than necessary.

An income tax rebate is a solution that helps us save money. But how? Each of us, in one way or another, is entitled to pay taxes directly or indirectly. However, tax rebates are not available on indirect taxes. It is because indirect taxes are based on the money spent. For direct taxes, we can apply for an income tax rebate u/s 87A by filing a tax return. 

Want to know more? Well then, read on! 

What is Rebate u/s 87A?

Back in the 1970s, there were around 11 personal income tax slabs, with 85% of tax in the highest bracket. However, over the last 50 years, there has been a high reduction in the tax slab. Now, the maximum bracket attracts around a 30% tax rate. 

Rebate u/s 87A is one of the best ways to reduce our income tax liability further. Let us have a look at the eligibility criteria that help us claim an income tax rebate u/s 87A.

  • The individual should be an Indian citizen.

  • Their overall income (after deductions) should be less than ₹5 lakhs. 

  • The maximum tax rebate amount is ₹12,500.

To claim the rebate, you need to file income tax returns. You can check your income tax refund status through different online portals.

Here is an example for better understanding:

As per the Income Tax Act 1961, if you have gross taxable income below ₹5 lakhs per year, you can claim a tax rebate u/s 87A. We can also easily claim an income tax rebate of around ₹12,500 via tax SOP (self-occupied properties). 

On the contrary, if your annual income exceeds ₹5 lakhs, you must pay the tax per your slab rate. In this case, you are not entitled to receive a refund of u/s 87A.  

Aside from the rebate under section 87A, there are sections like 80C, 80D, and 80EE that can help us lower the taxable income.

How to Claim Income Tax Rebate u/s 87A?

Process of claiming income tax Rebate u/s 87A.

There are some simple steps involved that will help us claim a tax rebate under section 87A. Let us look at these steps:

Step 1 - The process begins by calculating our previous financial year's gross total income.

Step 2 - We subtract all the tax deductions we have claimed for our tax-saving investments.

Step 3 - After subtraction, we will get the Gross Total Income. This term indicates the taxable income of the previous financial year.

Step 4 - Now, let us estimate the gross tax liability. However, one crucial thing to consider is that we don't have to add cess to the amount.

Step 5 - Before cess, we can claim the gross tax liability and then arrive at the net tax liability.

The income tax rebate u/s 87A is the same for both FY 2020–21 (AY 2021–22) and FY 2021–22 (AY 2022–23). The maximum rebate that can be claimed u/s 87A of the income tax act for FY 2022–23 is up to ₹12,500. 

Let us now look at examples to understand how the rebate is calculated and allowed.

Take the example of Mr Shyam. He works as a software developer at a Fintech company. His earnings for FY 2020–21 were around ₹2.6 lakhs. Besides this amount, the tax liability before the cess addition was ₹1000. 

As his annual income is less than ₹5 lakhs, Mr Shyam can claim the tax rebate of around ₹1000 under Section 87A of the Income Tax Act. Moreover, he has a tax liability of less than ₹12,500. His tax liability, in the end, becomes nil in this case.

Let us take another example. Miss Priya is a professional interior designer with an annual income of ₹5.5 lakhs in FY 2020–21. She calculates her tax liability for the same year at around ₹12,900. 

As she earns more than ₹5 lakhs and her tax liability exceeds ₹12,500, she won't be able to claim the tax rebate under section 87A of the Income Tax Act. In this case, her tax liability will be around ₹12,900 + cess at 4% = ₹13,416.

Important Things to Know About Section 87A

There is no doubt that the 87A rebate has made many taxpayers feel relaxed all across the country. However, we need to consider a few things about the rebate before saving income tax under the section.

  • If a person is non-Indian or NRI, they cannot reap the benefits of this tax rebate. 

  • Corporations, HUFs, and firms cannot avail themselves of access to the benefits of this tax rebate. 

  • Even though seniors between 60–80 years are eligible for the tax rebate, super seniors above 80 years are not.

The Bottom Line

Albert Einstein said, “The hardest thing in the world to understand is the income tax.” 

Understanding income tax and income tax rebates simultaneously can be overwhelming. But once the concept is clear, it can become one of the best ways to reduce tax liability.

Before applying for an income tax rebate, it is important to understand the eligibility criteria in detail. Not every taxpayer in India can avail of the rebate u/s 87A. 

Always compute the tax liability accurately and within the stipulated period to get access to the rebate. A rebate would be useless if delay in filing creates a greater liability than the rebate itself.

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